10/28/2007

Food Prices and Ethanol--Posner's Comment

Thomas Malthus, though like the rest of us not very good at predicting the future, was a brilliant economist. He was wrong that the human population would increase geometrically (he did not consider contraception as a means of voluntarily limiting population) and the supply of food only arithmetically (he did not foresee advances in the technology of food production). But he was right that achieving an equilibrium between population and food could require starvation, war, or other unattractive methods of limiting population. In this he foreshadowed natural selection, as Darwin acknowledged. Rising food prices are doubtless causing malnutrition and even starvation in some backward countries today, and if they continue to rise, more people will starve. Becker is correct that sensible policies can moderate the price increases, and perhaps restore the trend toward lower food prices, but who can be confident about the adoption of sensible policies?
An important factor in recent food price increases is the ethanol subsidies. Ethanol is a "clean fuel" in the sense that unlike gasoline its burning as a fuel does not produce the conventional pollutants, including carbon monoxide. It does produce carbon dioxide, the principal culprit in global warming, but this effect is said to be offset by the fact that the corn from which ethanol is manufactured absorbs carbon dioxide, as trees do. However, the manufacture of ethanol requires a great deal of energy (more energy, some critics believe, than the ethanol itself produces), and in China for example that energy is supplied mainly by coal-burning plants, a fertile generator of carbon dioxide. Moreover, deforestation by fire, common in the Third World, is increasing in order to provide more cropland for the production of ethanol, and deforestation by fire is a major source of atmospheric carbon dioxide.
So it is doubtful that ethanol is a significant part of the solution to the problem global warming--indeed it may be part of the problem--and in any event the subsidy is more often defended as an answer neither to conventional air pollution nor to global warming, but instead as a means toward making the United States self-sufficient in energy.
The federal subsidy alone is currently running at a level of $7 or $8 billion a year. There are state subsidies as well, and, more important than either type of direct subsidy, there are indirect subsidies in the form of legal requirements that gasoline producers purchase a specified amount of ethanol to mix in with their gasoline. A federal law enacted in 2005 doubled those requirements and is believed to have been a big factor in the ethanol boom and resulting recent increase in corn prices.
Ethanol could be bought cheaply from Brazil, but high tariffs prevent the Brazilian and other foreign producers from competing with our farmers and producers. We could not achieve energy self-sufficiency from our own production of ethanol. Even if all the corn produced in the United States were used to produce ethanol, which is unthinkable, the amount of gasoline consumed would fall by only 12 percent. (This is a little misleading; an enormous increase in the demand for ethanol would lead to more cropland being switched to corn from other crops. But that could result in much higher food prices.) Moreover, the amount of other fossil fuels consumed would rise because of the energy requirements for the production of ethanol.
We could as I said increase the percentage of our total fuel consumption that is supplied by ethanol by buying ethanol from abroad, and while that would make us dependent on other countries for an important part of our fuel supply, it would not be dependence on other oil-producing countries. That would be a benefit. Because of the instability of many of those countries (such as Iraq and Nigeria), and the hostility to the United States of some of them (such as Iran and Venezuela), there would be value in achieving energy independence, or at least a good deal more independence than we have today. But we cannot achieve it through the ethanol subsidy. We can achieve it (at least insofar as ethanol can contribution to the solution) only by relaxing the tariff on imported ethanol. But this sensible measure seems blocked by one of the absurdities of our political system--the Iowa caucuses, which extract pledges from all plausible presidential candidates to preserve and indeed expand our home-grown ethanol industry--and, more broadly, by the excessive influence of our tiny farm population on U.S. policy. As a result of these factors, ethanol subsidies are bipartisan.
Most ethanol is manufactured from corn. The United States is the world's largest exporter of grains, and exports of our corn account for one-fourth of total worldwide grain exports. As a result of the increasing diversion of U.S. corn to the production of ethanol, food prices in the United States and the world have soared. It is estimated that by the end of this year, food prices in the United States will have grown in real terms by almost 5 percent (a 7.5 percent nominal increase in price minus a 2.6 percent inflation rate).
Technology is more likely to bail us out before our political system does. What is called cellulosic, as distinct from corn, ethanol--the production of ethanol from a variety of plants, other than corn--holds promise for enabling ethanol to be produced without forcing up the price of corn, but is not yet commercially feasible.

Jack, Yes, there is an "exhaust problem" with Nuc's, but that's due to the symbiosis breakdwon I touched upon earlier. The D.O.E. and Industry are still waiting on the government to decide where and setup safe and secure storage for the waste. How long have we been waiting? Twenty or thirty years? So this stuff is still piling up on the sites. A rather scary thought.

Ahh Yes, if only I could invent a cheap, powerful, efficient, environmentally friendly, energy source I could retire a rich man. But there is that pesky problem of science fact versus science fiction.

Nabr asks: Why blame the oil-companies and the car manufacturers? Weren't they maximizing their shareholder value?

......... Good question which sums up the question of our age. IS "shareholder value" THE god of our time as we run out the resources we inherited?

I guess that would be bad enough by itself, but then there are the "extras" like the 6000 pound GVW tax deduction (only recently ended) that made it cheaper for businessmen to drive Hummers than for a secretary to drive a small sedan. Dare we even mention the goodies given by government to oil companies?

.......... and, have they maxxed shareholder value? Chrysler was sold for just three times Youtube's valuation. As Toyota steams past GM as the world's largest car mfg? And either Ford or GM can be bought for break-up value?

"Should we stop the "eat more beef" campaign since it surely will boost cardiovascular problems?"

.......... Not sure. Should we let "the market", CEO gleanings, and "shareholder value" run us off the cliff like so many lemmings?

Did you know that those of us who were in the Alaska salmon business wanted to tell Americans how much better wild salmon and omega III oils are for them but our industry and advertising resources were miniscule compared to beef, so you heard only the "eat more beef" and see many of the results. Some you don't see, like 70% of Alaska's salmon going to Japan where it improves the health of their consumers instead.

Neil; has some luddite or other rascal been sitting on the safe and secure storage spot for all these years? But more seriously France seems to make nuclear work for them, but then they've few other options. With the world "up the canyon" more will be forced to turn to nuclear. Even the Iran's or my state of Alaska will consider alternatives as fuel is just as expensive for an Alaskan consumer as for anyone else and we'd rather maximize what we can sell than to consume it ourselves. For the NK's and others with very low wages and few resources nuclear may be the ONLY choice.

And Ha! I do like the idea of science over fiction, including the gangs of lobbyists that "gave us" heavily subsidized corn based ethanol and spineless pols who've ignored conservation efforts since Carter left office. (Except for Clinton's foiled attempt to pass a BTU tax on non-renewables.)

Jack: I think the dire straits of the car companies does not reflect their big-car (fuel-guzzler) bias so much as their labor troubles and management inefficiencies. Those were unrelated issues. Another way to look at it: Another typical candidate for blame is the oil companies. But they have indeed maximized their shareholder value, right?

So the question is again: "Should companies maximize shareholder value?" I think they should maybe for the simple reason "if not shareholder value then what?" Can you give any other tangible that a company should shoot for? "Social responsibility" and "stakeholder value" are other terms touted by how does when quantify those? And then is a company management well suited to determine what level of compromise it seeks between these , often contrarian, goals?

So, should the cigarette companies sell cigarettes? Absolutely! So should car companies sell whatever cars they can make that maximize profits. (no matter how environmentally inefficient) Any other prescription leads to unnecessary ambiguity in the role of firms.

Now, it is up to the government to decide whether cigarettes (or big cars) are bad and then depending on those impose uniform regulation (or Stygian taxes) that make the production of these undesirable goods uneconomical or even illegal.

So, please, try to apportion a fair share of the blame where it is due! The regulatory bodies.

Of course, I think I'm taking far more of a radical position that I normally would but I think it helps clarify the argument. [ I personally would neither make cigarettes, or drive big cars! :-) ]

Much of the comment on the poor economics, carbon balance, energy efficiency etc of ethanol is incorrect, but would be correct if the comment was referenced to CORN ethanol.
CELLULOSIC ethanol has entirely better prospects and can be produced from various crops that could be grown on marginal land that is not currently productive, thus not putting pressure on food prices. The energy balance is much better. Further, valuable lignin can be extracted from a ligno-cellulosic crop. The lignin can be used as a polymer substitute for manufacture of various plastics and resins.

Brian; Thanks, but what we ran into is precisely the problem of one airline claiming they are less miserable than their competitor, ie. that a public squabble with farmed (already backed by larger pots of international corporate money) would further confuse the public on an already confusing situation.

(Wild salmon are not allowed an "organic" label while drug-ridden pen-raised non-salmon (Atlantics) with little to no Omega III oils are allowed an "organic" label even when fed land based feed.)

Developing the "wild" and "sustainable" image is about the best of the positive approaches and the one taking place today, but considering that in a highly labor intensive industry confronting the price advantage of fish farmed in venues of less than $1/hr labor is a bit of a tough row to hoe. As the low labor costs are so attractive in Chile, Norway and others have invested a lot into state of the art processing equipment that can be utilized year around while Alaska is stuck with "processors" using 100 year old shore based canneries and floating freezer plants that are utilized for only a small part of the year.

(In the accepted principles of economics did "relative advantage" intend to include vastly disparate wage levels?)

It's not trivial to try to figure out whether pricier "real salmon" is best off trying to snag a small percentage of the similarly priced beef market or to try to upgrade consumers from the lower priced Chilean farmed "salmon". I'm in the mid-west right now where the bland taste of the farmed gunked up with a sauce is perhaps preferable to many. It's all made worse by processors not caring too much whether they get their margins in Japan or the US though there are "boutique" efforts to re-develop the US market.

I personally asked "Flat-Earth" Friedman about the situation of Alaska having the valuable resource to harvest and process but is stuck with the high labor and other costs of operating in remote areas of Alaska having to "compete" with third world labor costs, and he tap-danced around with a shuck and jive about "things not looking too good for US exporters". Indeed.